Gas prices are spiking again ”” to an average of $3.22 a gallon, and close to $4 a gallon in many areas.
And some oil executives are now warning that the current shortages of fuel could become a long-term problem, leading to stubbornly higher prices at the pump.
They point to a surprising culprit: uncertainty created by the government’s push to increase the supply of biofuels like ethanol in coming years.
In his State of the Union address in January, President Bush called for a sharp increase in the use of biofuels, along with some improvement in automobile fuel efficiency to reduce America’s use of gasoline by 20 percent within 10 years. Congress is considering legislation calling for a nearly fivefold increase in the use of ethanol.
That has forced many oil companies to reconsider or scale back their plans for constructing new refinery capacity.
In hearings before Congress last year, oil executives outlined plans to increase fuel production by expanding existing refineries. Those plans would add capacity of 1.6 million to 1.8 million barrels a day over the next five years, for an increase of 10 percent, according to the National Petrochemical and Refiners Association.
But those plans have since been scaled back to more than one million barrels a day, according to the Energy Information Administration, an arm of the federal government.
“If the national policy of the country is to push for dramatic increases in the biofuels industry, this is a disincentive for those making investment decisions on expanding capacity in oil products and refining,” said John D. Hofmeister, the president of the Shell Oil Company. “Industrywide, this will have an impact.”
Somehow, whenever the government gets involved with the real world, the law of unintended consequences is always invoked, and the results are bad.
What hogwash. Unmitigated greed knows no bounds to the rationalizations offered to keep the gravy flowing.
In this country’s head-long rush to embrace “green” forms of energy (something that, aside from my solar-powered calculator, is virtually non-existent in its true form), I hope these kinds of stories get more play. While adopting more biofuels would give us the smug satisfaction of not importing as much oil from nefarious regions like the Middle East–although in reality most of the oil the United States imports comes from Canada, Mexico, and South America–it really would make no improvement to net energy consumption because biofuels are net energy losers. That is, it takes more energy on a BTU basis to make biofuels than is saved by switching from petroleum-based fuels, which are still the most efficient source of energy on a BTU basis. On top of that, we should consider the unintended environmental impacts of biofuel cultivation, such as bringing into production more arable land to produce biofuel crops, with the resulting consumption of water, fertilizer, and resulting degradation of the landscape and ecosystem from the run-off. There also will be an impact on the price of foodstuffs, as prices there will rise as more crop production is devoted to biofuels rather than food.
Professor (#2) – not necessarily. Refineries are very expensive and don’t return their investment for several (10+) years. It is also very hard to find a place that will allow you to build a refinery. So, oil companies want to be sure they get their investment back.
I believe that they are making excuses now, but they do have a point that uncertainity in the market decreases the chance that they will build more refining capacity.
YBIC,
Phil Snyder
Considering what vast sums they have been raking in for years, I don’t think they are that concerned about the return on their investment. I think they are concerned that their extravagant profits may decrease to merely ordinary profits.
How much vision would it take to re-imagine themselves as energy providers and plow some of those enormous profits into developing alternative energy sources?
Actually, I heard that the real reason more refineries are not being built is due to the excessive environmental regulations. One exec said it would take ten years just to fill out the paperwork.
Pres. Bush offered a few years ago to have refineries built on closed down military bases. It would make sense — they already have housing, roads for heavy duty traffic, environmental regs in place, and in many cases, access to ports or airfields. I think this would be a great solution, but like so many of his proposals, this one went nowhere, even with a Republican controlled congress.
Jim Elliott
I do have to wonder how the push for biofuels and the dedication of crops to this will effect efforts to eradicate hunger and famine in the developing world.
Sherri,
What do you think oil companies do with their profits? They go look for more oil, which keeps us supplied and keeps oil prices lower than if they directed profits to something other than producing oil.
Contrary to popular perception, oil company profit margins are not extraordinary by comparison with other industries. Exxon ranks 127 by profit margin on the list of Fortune 500 companies. Profits are large because revenues are huge.
Oil companies are tightly focused on return on investment, which is why they do not invest in any scale in alternative energy. The ROI on alternative energy is very low, and in most cases alternative energy would not survive without government subsidies. Ethanol is supported with a $.51 per gallon tax credit, and a $.50 per gallon import tax on foreign ethanol which keeps ethanol prices artificially high.
Alternative energy sounds warm and fuzzy, but if it were economical on its own merits, capital would be flooding into the sector. Additionally, many forms of alternative energy, biofuels in particular, have their own downsides. The huge downside of biofuels is that land and crops diverted to biofuels makes food more expensive.
Capitalism and the market work because the higher the price, the more incentive to increase supply, and the more incentive for consumers to use less, both of which will increase supply relative to demand, and the price will come down. Take away or redirect oil company profits by government mandate, and supplies will be less, and the price will be higher. Capitalism works for the benefit of all of us.
We need to leave the oil companies alone and let them do what they are very good at doing, finding, refining, and delivering more oil to the market.
Bill, considering what most CEOs in industry make these days, I’m not impressed that oil company profit margins are not extraordinary as compared to other industries. But setting aside that issue, there is nothing “warm and fuzzy” about finding or developing alternative energy sources – it is stark necessity. As long as we depend on the Middle East for oil, we will be stuck in the middle of the turmoil over there and on a long or short leash to OPEC. And that’s aside from the issue of how much oil remains. (We need to work on this from the other end, too, in terms of doing more with less energy – something American automakers should have been working hard on long ago.)
I’m not sold on biofuels as the answer (I think a lot of farmers where I live are going to end up losing money on this one) – but I think we need to be working very hard to find answers. And I think it is to be expected that developing new resources is going to require government – and oil company – investment. (As I said, the oil companies could think a little larger about what it is they supply – oil or energy?)
Capitalism and the market work because the higher the price, the more incentive to increase supply, and the more incentive for consumers to use less, both of which will increase supply relative to demand, and the price will come down.
American consumers haven’t been using noticeably less as prices have climbed, have they? Except the ones whose finances force them to cut back. Americans haven’t even stopped demanding gas-guzzling SUVs. The picture you paint – and I am a capitalist – is fine when there are no other concerns. National security and finite resources are very definitely involved here, though. For what it’s worth, I’m not mad at the oil companies for raising the price of gas, I know the law of supply and demand (and that supply is artificially manipulated, globally, too) – I’m mad at them for doing the same old thing when times demand some new thinking. But that seems to go across the board these days.
Apologies for the diatribe, Bill, it’s not aimed at you. I get depressed about this.
Sherri,
Thanks for the reply, I always enjoy a robust discussion of the issues. Part of the problem is that like most things in life, there are always tradeoffs among various choices. We have a lot of oil here in the US, but we cannot drill for it off the coast of Florida, California, or ANWAR. We have a 200 year supply of coal, but mining is messy and dangerous, and burning coal produces CO2 and we cannot do that because of global warming fears, a topic for another time.
We have oil shale in Colorado and Wyoming in immense quantities, but environmental restrictions make that difficult to develop. We should be building more nuclear plants, but we cannot do that because of the political opposition. We should be building more oil refineries to produce more gas, but we cannot do that because the lead time just for permitting is 8 to 10 years, and then another 8 years to build it, at cost of many billions and the ROI to justify an 18 year project before the first dollar of revenue will come in is unattainable.
The point is that the solution is not just alternative energy. Most forms of alternative energy have significant drawbacks in cost, transportability, location, side effects (even Joe Kennedy does not want a wind farm off of his place in Cape Cod), etc. that will forever keep them from being more than just a side show in the scheme of things.
There is always the law of unintended side effects. Mandated higher gas mileage, meant to conserve fuel, just means that people can live further form work and drive more for the same cost, tending to increase fuel usage.
In order to “solve†the problem of energy usage, we need to face the trade offs squarely, and be willing to build nuclear power plants, drill in Anwar, mine oil shale in Colorado, build new oil refineries, etc. The problem is political, not technological or financial.
n order to “solve†the problem of energy usage, we need to face the trade offs squarely, and be willing to build nuclear power plants, drill in Anwar, mine oil shale in Colorado, build new oil refineries, etc. The problem is political, not technological or financial.
Well said. I would add that it is also social – Americans have to *want* to be energy independent, then we have to have/elect a government smart enough and brave enough to weigh the options honestly and make some wise choices. I do think energy research (not necessarily what is now meant by “alternative energy”) should also be a component, though. Who says we have discovered all the ways there are of making energy? (I say that out of a lot of ignorance, but I think it’s always possible that we could push some limits, make some discoveries, if we were motivated enough.)